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Why Your Perspective on Growth and Value May Be Wrong

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The Motley Fool Singapore

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It’s no secret that growth and value are important when it comes to investing. But what is perhaps more important is understanding the relationship between the two, an insight that The Motley Fool explains a bit further here:

At some point in our investing lives, we might have come across someone, whether it’s a banker or an investment adviser, or even a sales person, talking about value strategy and growth strategy. It seems that most companies in the mutual fund industry view them as two separate and mutually exclusive strategies. It used to have me confused. But is there really any difference between a value strategy and a growth strategy? Are they really mutually exclusive? Let’s take a closer look.

 

What is the difference?

According to Fidelity Investment, one of the world’s largest investment firms, a growth fund is one that only look at companies with above average growth rate and the companies tends to trade at high multiples such as high P/E and P/B ratios. On the other hand, a value fund should restrict its holdings to companies with low growth rate and lower P/E and P/B ratios but has a good margin of safety for investing in them. There is also an assumption that investing in growth fund is riskier than investing in a value fund. So from my own interpretation of the description, maybe companies such as Q&M Dental Group (SGX: QC7) and Silverlake Axis (SGX: 5CP) can be considered as “growth” stocks while Rickmers Maritime (SGX: B1ZU) and Bonvests Holdings (SGX: B28) should be “value” stocks.

 

There is a Better Way

I personally feel that this method of viewing investment is both restrictive and serve hardly any purpose. There might be a better way to view growth and value. As the value of a company comes from the current earnings and earnings potential (which is growth) of a company. Growth is simply a function of value. We should view the two as a combined entity instead of two separate and competing terms.

Investing in companies with higher growth potential is not inheritably riskier than investing in low growth companies with a low P/E ratio. They are just different.

 

Foolish Bottomline

Lastly, companies do not need such labels to their business as well. The nature of business is dynamic and growth rate of a company can change at any time. Viewing investment strictly as just growth or value might do more harm than good to an investor.

 

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